Just before deadline, FINRA redoes home work assignment

Just as a remote work rule for broker-dealers was up for final approval, FINRA has snatched it back for further revisions.

The Financial Industry Regulatory Authority — the brokerage industry's self-regulator — put forward changes to its remote work proposal on March 29, a day before it was scheduled for adoption or rejection by the Securities and Exchange Commission. In general, the rule would have made brokers' home offices subject to in-house inspections only once every three years. The current standard calls for annual inspections by internal compliance officers.

FINRA's changes would prohibit brokerage employees from using their homes to store books or records in physical or electronic form. They would also make firms ineligible for the loosened inspections requirements if they had been suspended by FINRA, were the subject of a regulatory investigation or were registered with FINRA only in the past 12 months, among other things. And broker-dealers would have to provide FINRA with quarterly updates on the number of home offices being run by their employees.

FINRA's revisions come as remote work continues to be seen as a way to retain current employees and recruit newcomers. As in most industries, work-from-home policies became common in wealth management following the outbreak of the COVID-19 pandemic in March 2020.

Jennifer Szaro, the chief compliance officer of the brokerage and investment advisory XML Financial Group, said she knows of several employees who would no longer be with the firm if remote work wasn't possible. One, a young woman, had to move two years after being hired in 2018 in the Washington, D.C., area because her husband had taken a job in Guam.

"And now she's a superstar," said Szaro, who declined to identify the employee. "We were able to offer her the opportunity to work on projects remotely. And she has since realized she loves the industry and the clients she works with."

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Figures FINRA included in its rule proposal show its number of registered non-branch residential locations — meaning home offices that are exempt from certain inspection requirements — exploded during the pandemic. Between December 2019 and December 2022, the total went from 23,475 to 41,078, a 75% increase.

Despite remote work's popularity among brokerages and advisories, it's on the wane in other industries. In a Department of Labor poll released on March 22, 72.5% of the businesses surveyed reported their employees had tele-worked rarely or not at all in the previous year. That figure was up from 60.1% in 2021. Companies as diverse as Walt Disney, Meta Platforms (Facebook) and Starbucks have been pressuring employees to show up in person more often.

Brett Bernstein, the CEO of Rockville, Maryland-based XML Financial Group, said the tendency in the brokerage and advisory industries is still to expect accommodations for remote work. He said his firm's 51 employees were brought on in part through a pair of mergers during the pandemic. Those that came from other places often arrived with their own expectations and routines involving remote work. 

Some had to be in the office five days a week. Others were on hybrid schedules. Bernstein had to strike a balance. No one is now in full time. The most anyone is required to be in the office is three days a week.

"And I don't see us ever going back to full time," Bernstein said.

Praise for remote work has been echoed by many of the biggest players in the industry. Responding to a request for opinions on policies FINRA adopted during the pandemic, now-retired Edward Jones Deputy General Counsel Mary Jo Gillette wrote in a February 2021 letter: "Edward Jones has seen a significant increase in requests for flexible or hybrid work arrangements over the past few years from associates who, due to a variety of life circumstances, may not be able to work in a traditional work environment or to do so for a five day week."

FINRA's remote work proposal was first submitted in July 2022 and initially had a deadline of Aug. 23 for submitting comments. That was later extended to Oct. 31 amid pushback from groups like the Public Investors Advocate Bar Association, which represents investment clients' interests, and the North American Securities Administrators Association, which comprises state and provincial regulators in the U.S., Canada and Mexico. The public will now have 21 days to comment on the latest changes following their appearance in the Federal Register. 

Hugh Berskon, the president of PIABA and a securities lawyer at McCarthy Lebit Crystal Liffman in Cleveland, said he's still reviewing the latest changes but said it will take a lot for him and his fellow investor advocates to change their position.

"At a high level, we are not in favor of loosening inspection requirements for remote offices," he said.

A NASAA spokesman said the organization is still reviewing FINRA's latest proposal.

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FINRA's proposed remote work rule, though loosening in-house inspection requirements, would set limits on what sorts of business could be conducted in home offices. Employees working remotely, for instance, would be prohibited from using home offices to store any records or documents that are required by FINRA or federal rules. 

They would also have to abide by existing rules including prohibitions on meeting with customers at a remote office, on conducting certain types of transactions at home and on using anything but the parent firm's computer system for electronic communications.

FINRA is meanwhile pursuing a related proposal that would allow firms to sign up for a three-year pilot program meant to test whether in-house inspections of remote offices could be conducted remotely, rather than in-person. FINRA contends that remote inspections would merely formalize practices put in place under an emergency rule adopted during the pandemic. That emergency rule was recently extended to the end of 2023 while FINRA awaits SEC approval of its pilot program proposal.